Directors need to ensure they are aware of their company's tax decisions or risk more audits from the tax office, as Hall & Wilcox Tax Partner Peter Murray explains.

This doesn't mean directors need to be tax experts, but there can be a huge disconnect between what boards think is happening with their company's tax affairs and what is actually happening. This is a point Australian Taxation Office (ATO) Deputy Commissioner Jeremy Hirschhorn makes in a recent article in the Australian Financial Review.

Given their different roles and perspectives, a company's board may have widely differing objectives to its Chief Financial Officer and tax manager. The CFO will want to achieve the most attractive financial result. The board, on the other hand, will want to pay the 'right' amount of tax, whatever that may be, in keeping with the company's policies. Because of this potential disconnect, directors should be alert to the issues that underlie a company's tax positions.

The need for tax competence on boards

It's not common to have a tax expert on a board. In fact, while a board may have a director with financial expertise, boards as a whole tend to be short on tax competence. Boards may lack the awareness of how to apply tax laws and regulations, and they often don't even know about many of the transactions going on in their company and why these would raise tax risk red flags.

Jeremy Hirschhorn is not the first person to call for boards to up the ante on their tax risk management. The idea has been around for many years. But this still hasn't happened in all cases.

Justified trust

Companies need to show the ATO that its officials would be justified in trusting the company to manage its own tax affairs. If companies can achieve this 'justified trust' and make it evident, they will suffer fewer reviews by the ATO.

To do this, a company must demonstrate that it has a robust tax management and governance framework in place. The ATO has published a guide for this, called 'Tax risk management and governance review guide'. The guide sets out what kind of tax risk framework the ATO expects to see, and how you can test if you have the right controls in place.

Directors need to have sufficient experience and know-how to ask the right questions about the company's tax affairs and ensure these questions are being addressed; then you have transparency. While a director is not required to be a tax expert, all directors have a duty to keep informed about their company and its financial position. This includes being informed about tax matters that materially impact the company.

Bringing tax affairs into the light

Transparency is essential both within and outside the organisation. Internally, this means you won't have a situation where a director can say, 'I didn't know we were doing that' or 'I didn’t know that we had set up our tax structures in that way'.

According to Hirschhorn's view, the way it is now, directors in some cases are unaware of the aggressive tax structures their finance chiefs might be setting up. But it is their responsibility to ask company management the right questions so that the board is told about the proposed use of those structures (and then can consider whether the company should be adopting them). Otherwise, tax officials are right to ask, 'Well, why don’t you know? It's part of your job to know'.

Examples of aggressive tax structures include transactions that trigger the anti-avoidance rules or hybrid mismatch rules (ie double deductions).

Unorthodox tax planning strategies like BEPS (base erosion and profit shifting) have been used by some multinational companies to exploit gaps and differences between tax rules of different jurisdictions internationally. The Organisation for Economic Cooperation and Development's (OECD's) Base Erosion and Profit Shifting Action Plan was developed in response to these aggressive tax strategies.

The Panama Papers – and more recently the Paradise Papers – are useful here, as they contain evidence that some companies and individuals had set up aggressive tax structures or simply took part in straight-out tax avoidance. It has also been recently confirmed in the Courts that the Commissioner of Taxation can rely upon this type of information, however it is sourced.

Self-assessment

Companies are now opting for a health check of their tax risk management controls before the ATO comes in. By using the ATO's ‘tax performance program’, the largest 1,000 public and multinational companies and superannuation funds can self-assess where they are in the risk matrix. These 'streamline assurance reviews' will be rolled out to the mid-market over time.

If your company scores high, you would be unlikely to see ATO auditors for several years. But if you score low, you could go on to have a specific issue audit, general audit or a constant review. If you are a large corporate, you may already be under constant review, as your size alone makes your actions high risk.

In short, if you don’t fit within 'justified trust' and don't have a reasonably high level of tax risk management, then you are more likely to be audited.

Whistleblowers and data leaks

With increased protections for whistleblowers, corporate bad behaviour and non-compliance are more likely to be exposed – to the media, the public and the tax office. Directors need to heed the warning, assess their company's tax risk and take action to minimise it sooner rather than later.